-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KQLAxSLxHTO1/Ostp15glN4SvzqxcTAWPTbRvHp/0x9PMGu5Vc94mtUrxCXlYHIi nKFgn2GQ2/wDOFm7N57z5w== 0000898430-02-002027.txt : 20020515 0000898430-02-002027.hdr.sgml : 20020515 20020515153737 ACCESSION NUMBER: 0000898430-02-002027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALSTAR CORP CENTRAL INDEX KEY: 0000758938 STANDARD INDUSTRIAL CLASSIFICATION: MAGNETIC & OPTICAL RECORDING MEDIA [3695] IRS NUMBER: 953927330 STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30083 FILM NUMBER: 02651868 BUSINESS ADDRESS: STREET 1: 3990-B HERITAGE OAK COURT CITY: SIMI VALLEY STATE: CA ZIP: 93063 BUSINESS PHONE: 805-583-7744 MAIL ADDRESS: STREET 1: 3990-B HERITAGE OAK COURT CITY: SIMI VALLEY STATE: CA ZIP: 93063 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q --------------- [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission file number 000-30083 QUALSTAR CORPORATION Incorporated under the laws (I.R.S. Employer Identification of the State of California No.) 95-3927330 3990-B Heritage Oak Court Simi Valley, CA 93063 (805) 583-7744 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No The total shares of common stock without par value outstanding at May 14, 2002 is 12,656,101. Table of Contents - -------------------------------------------------------------------------------- PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements............................................... 3 Condensed balance sheets as of June 30, 2001 and March 31, 2002......... 3 Condensed statements of income for the three months and nine months ended March 31, 2001 and 2002......................................... 4 Condensed statements of cash flows for the nine months ended March 31, 2001 and 2002............................................... 5 Condensed statement of changes in shareholders' equity for the nine months ended March 31, 2002...................................... 6 Notes to interim condensed financial statements......................... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................... 8 ITEM 3. Qualitative and Quantitative Disclosures About Market Risk......... 11 PART. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K................................... 11 Signatures.............................................................. 12 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS QUALSTAR CORPORATION CONDENSED BALANCE SHEETS JUNE 30, 2001 AND MARCH 31, 2002 (in thousands)
JUNE 30, MARCH 31, 2001 2002 ------------ ------------- ASSETS (Unaudited) Current assets: Cash and cash equivalents................................. 20,809 $ 18,305 Marketable securities..................................... 6,278 11,398 Accounts receivable, net of allowances of $470 at June 30,2001 and $540 at March 31, 2002.............. 6,379 7,062 Inventories............................................... 10,632 10,134 Prepaid expenses and other current assets................. 400 433 Prepaid income taxes...................................... 927 32 Deferred income taxes..................................... 1,041 1,041 ------------ ------------- Total current assets.................................... 46,466 48,405 ------------ ------------- Property and equipment, net.................................. 1,126 1,147 Other assets................................................. 286 271 ------------ ------------- $ 47,878 $ 49,823 ============ ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 2,374 $ 1,076 Accrued payroll and related liabilities................... 227 425 Other accrued liabilities................................. 483 255 ------------ ------------- Total current liabilities............................... 3,084 1,756 ------------ ------------- Deferred income taxes........................................ 105 105 Shareholders' equity: Preferred stock, no par value; 5,000 shares authorized; no shares issued........................................ -- -- Common stock, no par value; 50,000 shares authorized, 12,601 and 12,653 shares issued and outstanding at June 30, 2001 and March 31, 2002, respectively.......... 20,691 20,717 Deferred compensation..................................... (1,061) (739) Notes from directors...................................... (512) (383) Accumulated other comprehensive income (loss)............. 60 (214) Retained earnings......................................... 25,511 28,581 ------------ ------------- Total liabilities and shareholders' equity............ 44,689 47,962 ------------ ------------- $ 47,878 $ 49,823 ============ =============
See the accompanying notes to these condensed financial statements. 3 QUALSTAR CORPORATION CONDENSED STATEMENTS OF INCOME THREE MONTHS AND NINE MONTHS ENDED MARCH 31, 2001 AND 2002 (in thousands, except per share amounts) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, ------------------------------- ------------------------------- 2001 2002 2001 2002 ------------- ------------- ------------- ------------- Net revenues............................................ $ 11,106 $ 8,603 $ 40,469 $ 27,431 Cost of goods sold...................................... 7,396 5,412 25,893 17,112 ------------- ------------- ------------- ------------- Gross profit......................................... 3,710 3,191 14,576 10,319 ------------- ------------- ------------- ------------- Operating expenses: Research and development............................. 383 533 871 1,523 Selling and marketing................................ 583 860 2,589 2,168 General and administrative........................... 987 946 2,429 2,672 ------------- ------------- ------------- ------------- Total operating expenses............................. 1,953 2,339 5,889 6,363 ------------- ------------- ------------- ------------- Income from operations.................................. 1,757 852 8,687 3,956 Interest income......................................... 317 256 966 882 ------------- ------------- ------------- ------------- Income before provision for income taxes................ 2,074 1,108 9,653 4,838 Provision for income taxes.............................. 729 413 3,697 1,768 ------------- ------------- ------------- ------------- Net income.............................................. $ 1,345 $ 695 $ 5,956 $ 3,070 ============= ============= ============= ============= Basic earnings per share................................ $ 0.11 $ 0.06 $ 0.49 $ 0.25 ============= ============= ============= ============= Diluted earnings per share.............................. $ 0.11 $ 0.05 $ 0.47 $ 0.24 ============= ============= ============= ============= Shares used to compute earnings per share: Basic................................................... 12,423 12,513 12,236 12,470 ============= ============= ============= ============= Diluted................................................. 12,702 12,743 12,667 12,665 ============= ============= ============= =============
See the accompanying notes to these condensed financial statements. 4 QUALSTAR CORPORATION CONDENSED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED MARCH 31, 2001 AND 2002 (in thousands) (UNAUDITED)
2001 2002 -------------- -------------- OPERATING ACTIVITIES: Net income.......................................................... $ 5,956 $ 3,070 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................... 148 205 Amortization of deferred compensation........................... 333 322 Provision for bad debts and returns............................. -- 70 Accrued interest on directors' notes............................ (28) (23) Changes in operating assets and liabilities: Accounts receivable........................................... 119 (753) Inventories................................................... (571) 498 Prepaid expenses and other assets............................. (254) (18) Prepaid income taxes.......................................... (1,756) 895 Accounts payable.............................................. 317 (1,298) Accrued liabilities........................................... 45 (30) -------------- -------------- Net cash provided by operating activities.............................. 4,309 2,938 -------------- -------------- INVESTING ACTIVITIES: Purchases of equipment and leasehold improvements................... (909) (226) Purchases of marketable securities, net............................. (4,111) (5,394) -------------- -------------- Net cash used in investing activities.................................. (5,020) (5,620) -------------- -------------- FINANCING ACTIVITIES: Proceeds from issuance of common stock, net of offering costs........................................... 2,318 -- Proceeds from exercise of stock options............................. -- 26 Principal and interest payments on directors' notes................. 140 152 -------------- -------------- Net cash provided by financing activities.............................. 2,458 178 -------------- -------------- Net increase(decrease) in cash and cash equivalents.................... 1,747 (2,504) Cash and cash equivalents at beginning of period....................... 18,976 20,809 -------------- -------------- Cash and cash equivalents at end of period............................. $ 20,723 $ 18,305 ============== ============== Supplemental cash flow disclosures: Income taxes paid................................................... $ 3,380 $ 873 ============== ==============
See the accompanying notes to these condensed financial statements. 5 QUALSTAR CORPORATION CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY NINE MONTHS ENDED MARCH 31, 2002 (in thousands) (UNAUDITED)
ACCUMULATED PREFERRED STOCK COMMON STOCK NOTES OTHER ---------------- ----------------- DEFERRED FROM COMPREHENSIVE RETAINED SHARES AMOUNT SHARES AMOUNT COMPENSATION DIRECTORS INCOME EARNINGS TOTAL -------- ------ -------- ------- ------------ --------- ------------- -------- -------- Balance at July 1, 2001.......... -- $ -- 12,601 $20,691 $ (1,061) $ (512) $ 60 $ 25,511 $ 44,689 Amortization of deferred compensation.................... -- -- -- -- 322 -- -- -- 322 Exercise of stock options........ -- -- 52 26 -- -- -- -- 26 Accrued interest on directors' notes........................... -- -- -- -- -- (23) -- -- (23) Receipt of principal and interest payments on directors' notes.... -- -- -- -- -- 152 -- -- 152 Comprehensive income: Change in unrealized gains on investments.................... -- -- -- -- -- -- (274) -- (274) Net income...................... -- -- -- -- -- -- -- 3,070 3,070 -------- Comprehensive income............ 2,796 -------- ----- ------ --------- ------------ ---------- ------------- -------- -------- Balance at March 31, 2002........ -- $ -- 12,653 $ 20,717 $ (739) $ (383) $ (214) $ 28,581 $ 47,962 ======== ===== ====== ========= ============ ========== ============= ======== ========
See the accompanying notes to these condensed financial statements. 6 QUALSTAR CORPORATION NOTES TO INTERIM CONDENSED FINANCIAL STATEMENTS MARCH 31, 2002 (in thousands, except per share amounts) (UNAUDITED) NOTE 1. BASIS OF PRESENTATION The accompanying condensed financial statements are unaudited, except for the balance sheet at June 30, 2001 which is derived from our audited financial statements, and should be read in conjunction with the financial statements and related notes included in Qualstar Corporation's ("Qualstar," "us," "we," or "our") Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on September 28, 2001. In the opinion of management, these unaudited condensed financial statements include all adjustments, consisting primarily of normal recurring items, which are necessary for the fair presentation of Qualstar's financial position as of March 31, 2002, results of operations for the three and nine months ended March 31, 2001 and 2002, and cash flows for the nine months ended March 31, 2001 and 2002. Operating results for the three and nine month periods ended March 31, 2002 are not necessarily indicative of results to be expected for a full year. NOTE 2. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended March 31, 2001 and 2002:
THREE MONTHS ENDED NINE MONTHS ENDED MARCH 31, MARCH 31, --------------------------- --------------------------- 2001 2002 2001 2002 ----------- ----------- ----------- ----------- Numerator: Net income.......................................... $ 1,345 $ 695 $ 5,956 $ 3,070 Denominator: Denominator for basic net income per share -- weighted average shares........................ 12,423 12,513 12,236 12,470 Dilutive potential common shares from employee stock options, and restricted stock............... 279 230 431 195 ----------- ---------- ----------- ---------- Denominator for diluted net income per share -- adjusted weighted average shares and assumed conversions............................... 12,702 12,743 12,667 12,665 ----------- ---------- ----------- ---------- Basic net income per share............................. $ 0.11 $ 0.06 $ 0.49 $ 0.25 =========== ========== =========== ========== Diluted net income per share........................... $ 0.11 $ 0.05 $ 0.47 $ 0.24 =========== ========== =========== ==========
NOTE 3. MARKETABLE SECURITIES Marketable securities consist primarily of high-quality U.S. corporate securities. These securities are classified in one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. All other securities not included in trading or held-to-maturity are classified as available-for-sale. All of the Company's marketable securities were classified as available-for-sale at June 30, 2001 and March 31, 2002. 7 Available-for-sale securities are recorded at market value. Unrealized holding gains and losses, net of the related income tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of shareholders' equity until realized. Dividend and interest income are recognized when earned. Realized gains and losses for securities classified as available-for-sale are included in earnings when the underlying securities are sold and are derived using the specific identification method for determining the cost of securities sold. NOTE 4. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out basis) or market. Inventory is comprised as follows:
JUNE 30, 2001 MARCH 31, 2002 ---------------- ------------------ Raw materials............... $ 9,001 $ 8,443 Finished goods.............. 1,631 1,691 ---------------- ------------------ $ 10,632 $ 10,134 ================ ==================
NOTE 5. COMPREHENSIVE INCOME For the nine months ended March 31, 2001 and 2002, comprehensive income amounted to approximately $6.0 million and $2.8 million, respectively. The difference between net income and comprehensive income relates to the changes in the unrealized losses or gains the Company recorded for its available-for-sale securities. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements inherently are subject to risks and uncertainties, some of which we cannot predict or quantify. Our actual results may differ materially from the results projected in the forward-looking statements. Factors that might cause such a difference, include, but are not limited to, those discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2001 in "ITEM 1 Business," including the section therein entitled "Risk Factors," and in ITEM 7 Management's Discussion and Analysis of Financial Condition and Results of Operations." You generally can identify forward-looking statements by the use of forward-looking terminology such as "believes," "may," "expects," "intends," "estimates," "anticipates," "plans," "seeks," or "continues," or the negative thereof or variations thereon or similar terminology. We disclaim any obligation to update or revise these forward-looking statements to reflect the occurrence of events or circumstances in the future. RESULTS OF OPERATIONS Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001. NET REVENUES. Revenues are recognized upon shipment of the product to the customer, less estimated returns, for which provision is made at the time of sale. Net revenues for the three months ended March 31, 2002 were $8.6 million, a decrease of 22.5% compared to net revenues of $11.1 million for the three months ended March 31, 2001. This decrease in revenues was due primarily to a slowdown in market spending on internet infrastructure, telecommunication and storage back-up solutions. The selling prices of our tape libraries remained relatively stable during both periods. The selling prices of tape media and drives have declined since the third quarter of fiscal 2001, resulting in an overall lower price for our libraries. The decline in the selling prices of media is the result of these items being placed in general distribution by the manufacturer. 8 GROSS PROFIT. Gross profit was $3.2 million or 37.1% of net revenues for the three months ended March 31, 2002 compared to $3.7 million or 33.4% for the three months ended March 31, 2001, representing a decrease of 14.0%. Our gross margin is partially a function of the mix of products sold. Generally, larger tape libraries have higher gross profit margins as a percentage of sales. The increase in our gross profit margin as a percentage of net revenues is primarily the result of higher sales of larger tape libraries. In addition, sales of tape media during the third quarter of fiscal 2002 declined as compared to fiscal 2001. In general, gross margins on tape media are lower than gross margins on our tape libraries. We expect our gross margins to remain stable for the fourth quarter of fiscal year 2002. RESEARCH AND DEVELOPMENT. Research and development expenses consist of engineering salaries, benefits, purchased parts and supplies used in development activities. Research and development expenses for the three months ended March 31, 2002 were $0.5 million or 6.2% of revenues as compared to $0.4 million and 3.4% of revenues for the three months ended March 31, 2001. Our higher research and development spending reflects our efforts to increase the rate of flow of new products to market. We expect research and development expenses to continue to increase as a percentage of revenues in future periods. SELLING AND MARKETING. Selling and marketing expenses consist primarily of employee salaries and benefits, sales commissions, trade show costs, advertising, technical support and travel related expenses. Selling and marketing expenses for the three months ended March 31, 2002 were $0.9 million, an increase of $0.3 million compared to the three months ended March 31, 2001. Selling and marketing expenses as a percentage of net sales was 10.0% for the three months ended March 31, 2002 as compared with 5.2% for the three months ended March 31, 2001. The increase in selling and marketing expenses is attributable primarily to increased spending on salaries, trade shows and advertising, as well as a decrease in marketing funds provided to us by our suppliers. We anticipate selling and marketing expenses will remain stable as a percentage of sales for the fourth quarter of fiscal year 2002. GENERAL AND ADMINISTRATIVE. General and administrative expenses consist of employee salaries and benefits, deferred compensation related to equity incentives, provisions for doubtful accounts and returns and professional service fees. General and administrative expenses for the three months ended March 31, 2002 were $0.9 million, or 11.0% of sales, consistent with $1.0 million, or 8.9% or sales, for the three months ended March 31, 2001. The increase in general and administrative expenses as a percentage of sales is primarily due to an overall decrease in sales levels without corresponding reductions in general and administrative spending. We do not anticipate that general and administrative expenses will significantly increase in the fourth fiscal quarter. PROVISION FOR INCOME TAXES. The provision for income taxes was $0.4 million or 37.3% of pre-tax income, for the three months ended March 31, 2002, compared to $0.7 million, or 35.1% of pre-tax income, for the three months ended March 31, 2001. Nine months Ended March 31, 2002 Compared to Nine months Ended March 31, 2001. NET REVENUES. Net revenues for the nine months ended March 31, 2002 were $27.4 million, a decrease of 32.2% compared to net revenues of $40.5 million for the nine months ended March 31, 2001. This decrease in revenues was due primarily to a slowdown in market spending on internet infrastructure, telecommunication and storage back-up solutions. The selling prices of our tape libraries remained relatively stable during both periods. The selling prices of tape media and drives have declined since the third quarter of fiscal 2001, resulting in an overall lower price for our libraries. The decline in the selling prices of media is the result of these items being placed in general distribution by the manufacturer. 9 GROSS PROFIT. Gross profit was $10.3 million or 37.6% of net revenues for the nine months ended March 31, 2002 compared to $14.6 million or 36.0% for the nine months ended March 31, 2001, representing a decrease of 29.2%. Our gross margin is partially a function of the mix of products sold. Generally, larger tape libraries have higher gross profit margins as a percentage of sales. The increase in gross profit margin as a percentage of net revenues is primarily the result of higher sales of larger tape libraries. In addition, sales of tape media during the nine months ended March 31, 2002 declined as compared to the same period of fiscal 2001. In general, gross margins on tape media are lower than gross margins on our tape libraries. RESEARCH AND DEVELOPMENT. Research and development expenses for the nine months ended March 31, 2002 were $1.5 million or 5.6% of net revenues as compared to $0.9 million and 2.2% of revenues for the nine months ended March 31, 2001. Our higher research and development spending reflects our efforts to increase the rate of flow of new products to market. We expect research and development expenses to continue to increase as a percentage of revenues in future periods. SELLING AND MARKETING. Selling and marketing expenses for the nine months ended March 31, 2002 were $2.2 million, a decrease of $0.4 million compared to the nine months ended March 31, 2001. Selling and marketing expenses as a percentage of net revenues was 7.9% for the nine months ended March 31, 2002 compared with 6.4% for the nine months ended March 31, 2001. GENERAL AND ADMINISTRATIVE. General and administrative expenses for the nine months ended March 31, 2002 increased to $2.7 million, or 9.7% of revenues, as compared to $2.4 million or 6.0% of revenues, for the nine months ended March 31, 2001. The increase in general and administrative expenses is primarily due to increased spending on salaries for administrative personnel. PROVISION FOR INCOME TAXES. The provision for income taxes was $1.8 million or 36.5% of pre-tax income, for the nine months ended March 31, 2002, compared to $3.7 million, or 38.3% of pre-tax income, for the nine months ended March 31, 2001. LIQUIDITY AND CAPITAL RESOURCES Historically, we have funded our capital requirements with cash flows from operations. Cash flows provided by operating activities were $2.9 million and $4.3 million for the first nine months of fiscal 2002 and 2001, respectively. In each of these periods, operating cash was primarily provided by net income. Cash flows used in investing activities have increased in the first nine months of fiscal year 2002 to $5.6 million as compared to $5.0 million for the nine months ended March 31, 2001. This increase was due to increased purchases of marketable securities in the first three quarters of fiscal year 2002. Cash flows provided by financing activities during the first nine months of fiscal 2002 were $0.2 million and was primarily due to cash payments on directors' notes. Cash flows provided by financing activities during the first nine months of fiscal 2001 were $2.5 million, and were primarily the result of the sale by Qualstar in July, 2000 of 375,000 shares of our common stock at $7.00 per share pursuant to the exercise by the underwriters of our initial public offering of their over-allotment option. We believe our existing cash and cash equivalents, and anticipated cash flows from operating activities, will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. We may utilize cash to invest in businesses, products or technologies we believe are strategic. We regularly evaluate other companies and technologies for possible investment by us. In addition, we have made and expect to make investments in companies with whom we have identified potential synergies. However, we have no present commitments or agreements with respect to any material acquisition of other businesses or technologies. 10 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. Since all sales are currently made in U.S. dollars, a strengthening of the U.S. dollar could make our products less competitive in foreign markets. Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. We have no outstanding debt nor do we utilize derivative financial instruments. Therefore, no quantitative tabular disclosures are required. PART II - OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K. (b) No Reports on Form 8-K were filed during the fiscal quarter ended March 31, 2002. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QUALSTAR CORPORATION Dated: May 14, 2002 /s/ William J. Gervais ------------------------------------------ William J. Gervais, President and Chief Executive Officer Dated: May 14, 2002 /s/ Matthew Natalizio ------------------------------------------ Matthew Natalizio, Chief Financial Officer 12 -----END PRIVACY-ENHANCED MESSAGE-----